Microsoft is preferred over Apple due to more attractive valuation; DCF fair value is $451 vs current price of $511.

Apple and Microsoft have taken radically different approaches to the artificial intelligence boom . Microsoft has invested hundreds of billions of dollars in building data centers and investing in strategically important companies such as OpenAI.

So, given these two very different approaches to the AI boom, which of these two companies is the better stock to buy right now? Over the past decade, Apple and Microsoft have done an excellent job of increasing revenue.

Meanwhile, Microsoft's sales are increasing primarily due to increased sales in its cloud services unit . This is where most of the company's investments in artificial intelligence went to building these data centers, which it then leases to companies like OpenAI that consume that computing power.

Microsoft's backlog in this category has exceeded $500 billion, but there is concern among investors due to the heavy focus on OpenAI. As OpenAI loses a lot of money, investors are worried about whether Microsoft will actually get the money that OpenAI owes it .

When measured by operating profit margin , Microsoft has a 46.8% advantage, which is almost double what it was in 2017 when it was closer to 25%.

At the same time , Microsoft's return on invested capital is only a small fraction of Apple's, because Microsoft has invested hundreds of billions of dollars in the company, especially in recent years.

However, its 26% return on invested capital is more than double, or nearly double, its average weighted cost of capital. Therefore, the number itself is strong. It only seems of lower quality when compared to what Apple achieves .

Apple shares are trading at a forward price-to-earnings ratio of 33, which is more than 50% more expensive than Microsoft shares, which are trading at a forward price-to-earnings ratio of 21.7 .

I also like to look at the valuation using the discounted cash flow model, and I calculated the fair value of Microsoft stock at $451. Compared to the current market price of $511, the stock appears to be fairly valued when including my margin of safety , as it is about 11% higher than my estimate of fair value.

Now, if I had to choose between these two excellent companies, I would choose Microsoft because of the more attractive rating.